ND farmers’ Colorado, Texas dealings wreak legal havoc

FARGO, N.D. — A Grafton, N.D., farmer who grew two large farming operations in Texas and then Colorado in the past three years is mired in a remarkable blur of lawsuits, counter- and cross-claims, among former partners and lenders.

Key members of longtime implement dealership were partners with Grafton farmer Tom Grabanski in some of his farming efforts in Colorado. Sales manager Jeff Hanson of Hanson Auto and Implement declined comment on matters under litigation between partners and Grabanski entities that filed for bankruptcy protection last July. (Mikkel Pates / Agweek)

FARGO, N.D. — A Grafton, N.D., farmer who grew two large farming operations in Texas and then Colorado in the past three years is mired in a remarkable blur of lawsuits, counter- and cross-claims, among former partners and lenders.

The central figures in the businesses, Thomas M. and Mari Grabanski — and separately their grain elevator — filed for Chapter 11 bankruptcy in late July 2010. A few months ago, Grabanski moved his young family to Texas. His lenders and some former partners are alleging various kinds of misrepresentations. The word fraud appears in the allegations.

Claims total in the tens of millions of dollars. One lender — PHI Financial Services Inc. of Johns-

town, Iowa — states its claim at $7 million. Farm Credit Services AgCountry, Fargo, has more than $3.5 million in claims, involving various entities. At least 13 farmers dealing with a grain elevator Grabansksi owned may be owed money, and former partners say they’ve been surprised when sent warnings by lenders that they are responsible for debts they claim they didn’t know about.

Down south, operations on several farms totaling tens of thou-sands of acres in three states reportedly are downsized, with sales of land and/or equipment.

PHI (a financial subsidiary of Pioneer Hi-Bred International Inc.) says Grabanski established a complex network of entities that own or lease land and engage in farming operations. PHI claims Grabanski improperly intermingled activities and “loans” among these entities without proper documentation. AgCountry alleges Grabanski sold collateral grain to unauthorized buyers and in its claims lists 27 entities he may have used.

Various creditors and debtors so far have tried in vain to depose Grabansksi about how the inner workings of the various operations. Such interviews initially were scheduled and postponed four times since September and most recently were set Nov. 24, a day before Thanksgiving. The courts allowed earlier delays, with Grabanski citing “anxiety attacks” and depression-related problems, as creditors confiscated property “down to personal transportation.”

While lenders aggressively pursue their claims, some Grabanski entities are in court in Colorado, challenging what they say is the government’s mid-stream effort to stop excessive losses in a government crop insurance program in Colorado. The so-called Group Risk Income Protection program policies are mired in separate but related legal disputes.

None of this is normal for Grafton, a quiet farming town of about 4,500 people.

SOUTH, TO TEXAS

Grabanski, 42, is the youngest of five children of Merlyn and Dolores Grabanski, and they have at least shared efforts on farms, near Grafton. The parents are in their 70s and are involved as guarantors in some of his loans. In the past several years, Tom also has been a crop insurance agent and has run a trucking business.

The Grabanski family has had its share of heartbreaks. Tom’s older single brother, Bryan, who had farmed with Tom and his father, died in 2005 at age 43 in a drowning incident along the then-flooded Forest River.

A few months later, Tom launched a series of aggressive farming enterprises:

n In 2006, Grabanski led partnerships into a Texas farming operation.

n In June 2007, he established Grabanski Grain L.L.C., a commercial elevator, which grew to a capacity of 940,000 bushels.

n In 2008, Grabanski led investors into farming in Colorado.

Agweek attempted to reach Tom and Mari Grabanski to discuss how all of this happened. The couples’ phones are disconnected. Family members have declined to respond to phone messages. Other partners in the deals have declined comment, as have many of their lawyers. For now, only court records offer a glimpse into how the farms got started.

Among the first of the Grabanskis’ forays into Texas farming was with John and Dawn Keeley, who farm near Grafton. The two farming couples are of similar age in a small town. (Dawn had worked at the North Dakota Small Business Development Center in Grafton and is an economic development finance professional.)

In a recent “adversary” action in the Grabanski bankruptcy, the Keeleys recount that the two couples formed a joint venture and leased 4,000 acres in Texas in 2006. Tom Grabanski reported the venture lost $400,000 in that year. For whatever reason, they pressed on.

In 2007, the couples’ joint venture continued leasing some amount of Texas land, the Keeleys say. That year, they made a “substantial profit because of high yields.” They say Tom paid off the operating line and told them there was “money to purchase additional land.” So they bought parcels in Bowie, Lamar and Red River counties in Texas (4,216 acres) as well as Walsh and Pembina counties in North Dakota (702 acres).

One of the land sellers is Lenita Unruh, who has farmed with her husband, Earl, near Blossom, Texas. The Unruhs also are in concrete construction, Unruh says, and they decided to focus on the construction and to retire from active farming.

Lenita Unruh recalls that a 2007 lease with Grabanski was followed by a 2008 purchase — a contract-for-deed, with a good down payment and a “fair price” on the Unruhs’ 1,800-acre tract. The farm largely is what’s called “black land,” meaning that it holds water better than some of the sandier land in the area. A few months later, Grabanski bought another 500 acres or so in two separate parcels.

The Unruh sales included a 4,000-square-foot house that the Unruhs built about eight years ago. They kept back some property and built another 3,000-square-foot home.

On Jan. 1, 2008, the Keeleys and Grabanski formed a new partnership — G&K Farms — designed to rent and farm land from the Keeley Grabanski Partnership.

According to the Keeleys’ documents, Tom Grabanski and John Keeley were to be “managing partners” in G&K Farms, meaning that each needed the other’s approval for any “action” involving more than $1,000. The Keeleys, now G&K, leased 8,000 acres.

Budget projections

The Keeleys say G&K Farms obtained financing from Choice Financial of Grafton. G&K also obtained crop insurance which their documents say “guaranteed that G&K Farms would gross $400 an acre for corn acres (80 bushels@ $5/acre). The budgeted Texas inputs were less than $400 an acre,” they say. The documents say Grabanski “informed the Keeleys” that G&K Farms somehow took a $2.5 million operating loss, despite the insurance.

Whatever the cause of the 2008 losses in Texas, the Keeleys say G&K carried more than $3.5 million in operating debt to 2009. The partnership sold some parcels to pay down the operating line at Choice Financial.

Unruh says the contract-for-deed was set up for January payments.

She recalls that Grabanski farms were heavily into corn production in 2008. The first Unruh land accounted for some 1,800 acres, she says, and she says it appeared that the operation covered several thousand more acres in the area, using several employees. She says it appeared equipment was moved back and forth for farming in North Dakota.

About half of the Unruh land in the Grabanski-related operations is irrigated, with four sprinkler systems. Irrigators are fed from surface water — man-made “ponds” that typically are set up down-grade from the irrigated parcel, she says. If the land is irrigated and then a rain comes, the excess moisture goes back into the pond. Unruh says her family had owned and operated the 1,800 acres for a decade and had only purchased crop insurance in one of those years.

“Yes, that was a dry year and we did get crop insurance money,” she says.

Otherwise, the family only bought the basic catastrophic crop insurance, and never needed it.

From the documents, it appears that either the Keeleys or Grabanskis, or both, wanted the partnerships to end in 2009.

The Keeleys say Tom Grabanski in May 2009 told them he’d pay all of G&K Farms’ debt if the Keeleys assigned their partnership interests in both G&K Farms and the Keeley Grabanski Land Partnership to him. Documents show the agreement was formalized Sept. 24, 2009, but with some kind of provision to make it “effective” six months earlier on April 1, 2009.

A partnership split?

The Keeleys contend that “after planting its crop in 2009, G&K Farms discontinued operations” and the Keeleys became unaware of where funds were distributed or paid.

“Grabanski agreed to pay all the debts, liabilities and expenses of the partnership,” they say. Instead, they contend Grabanski “transferred G&K’s Farm assets, including crop proceeds, crop insurance proceeds, and equipment for the benefit of Grabanski and Grabanskis’ other farming entities while intentionally acquiring debt in G&K Farms.”

In their documents, the Keeleys make a point to describe a particular transaction. They say that in the “spring of 2009,” Grabanski traded two, 24-row corn planters ($100,000 each) and a John Deere tractor — a piece they say was collateral for a G&K Farms loan — and traded them for two air seeders which are “titled in Texas Family Farms,” which are owned by other Tom and Mari Grabanski entities and not the Keeleys.

Meanwhile, the Keeleys say they were told that Grabanski, on behalf of another partnership, Texas Family Farms, had financed the year’s crop through Choice Financial. The financing was to cover a “minimum of $800,000 of G&K Farms’ outstanding debt,” they say. On April 12, 2010, the Keeleys say they were served from PHI Financial Inc., indicating that they, as partners in G&K Farms, were liable for a $7.2 million debt, an obligation they claim they knew nothing about.

In the 2010 crop, Lenita Unruh says she thought the Grabanski operation had largely produced soybeans and alfalfa, perhaps planted after the soybean crop. Typically, soybeans require less inputs than does corn. Alfalfa is not a crop that the Unruhs had ever grown on the land.

Unruh can’t say for sure whether the operation in 2010 was irrigating the same as some others in the community.

“You’ve got to buy diesel fuel to irrigate with the ponds,” Unruh says. “Water is free, from God, but you have to get it out of that lake and through that system.”

In July 2010, the Keeleys say Grabanski and Choice Financial provided cash flow projections to them, saying $2.3 million would be available from Texas Family Farms’ 2010 crops to apply “for G&K Farms’ indebtedness to Choice (Financial).”

The Grabanskis filed for Chapter 11 bankruptcy July 22, 2010.

COCKEYED COLORADO

As the Texas farms moved ahead in 2008 and 2009, the Grabanskis also extended their farming into Colorado.

On Jan. 1, 2008, (the same date they formed G&K Farms for Texas farming) they formed Colorado Farms partnership, which included Jeffrey, Amanda, Brian, Ranell Hanson, from Grafton, as well as Grafton farmers James and Carol Tallackson. The Hansons are part of the Hanson Auto and Implement operation on the west edge of Grafton and one of the community’s long-standing business leaders.

Colorado Farms set up operations in Springfield in Colorado’s Baca County. It’s the southeast corner of Colorado, next to New Mexico and Oklahoma on the south and Kansas on the east. It is semi-arid, with an average annual rainfall of 12 to 17 inches.

On April 1, 2008, some of the same partners formed Hanson-Colorado Farms, but not the Tallacksons. (The Hanson-Tallackson parties later would become creditors of the Grabanskis in bankruptcy court.)

“He was already dealing with a Texas broker,” Brown says. “They approached me about buying some land, and they did quote prices considerably in excess of what values were at that time in the area. We assured them if they wanted to pay those prices they could probably buy quite a lot of land.”

In 2008, unusually high corn prices made nonirrigated corn production more attractive, the RMA later would say. Baca County had the highest increase of corn production in the United States in 2008, the government says. The market for nonirrigated farmland was in the $350- to $400-an-acre range, and Grabanski was offering $700. They were offering $1,500 an acre for irrigated land, $400 for pasture land — both about double the going rate.

Brown says Grabanski talked about buying with a smaller-than-typical down payment, on a contract-for-deed basis. In Colorado, Brown says, that kind of deal is “more of an option than an actual purchase,” Brown says.

“I told Grabanski if you want to buy land and pay for it, I’d be happy to help you,” Brown says.

He did some transactions with Colorado Farms for cash. He did one deal in April 2008, but thought it was “small” when compared with other deals Grabanski was involved with. Some of the records indicate the Grabanski-related deals were more than 10,000 acres.

Nick Palmer, who sells crop insurance in the P.J. Wilson Insurance firm in Springfield and Lamar, Colo., describes Baca County as a highly variable county. On the west side, there are more trees, hills and canyon lands — cattle country. Farther east, there is flatter, sandier farmland. He says when the Grabanski groups came in to buy land, some farmers who had “farmed their whole life” decided to sell, thinking they were “never going to see those dollars (prices) again.”

In February 2008, Palmer says the Grabanski operations “made their presence known.” He says the initial thought was that the newcomers saw lower land prices and opportunities for wind power development. Soon, Palmer says, his clients came in and began asking questions about what the outsiders were doing with crop insurance and whether they needed to do the same thing. Activity heated up before the March 15 crop insurance deadline that year.

Essentially, the GRIP program paid out on an average of yield results of irrigated and dry-land corn, he says.

“The system was almost set up that there would be a loss,” Palmer says.

He says farmers who signed up for GRIP expected $500-an-acre payments. The RMA offered coverage with “no-practice specified,” meaning the farmer could choose to irrigate or not, and get the same payment.

The program is based on USDA’s National Agricultural Statistics Service yield data and is county-based. During the past 10 to 15 years, the trend was more dry-land than irrigated, he recalls, so corn yields skewed downward.

“A lot of irrigated land was planted to wheat, and that left fewer acres for corn,” he says.

RMA goes on alert

Palmer says the Grabanski entities planted mostly corn. He says that between March 15 and June 1, 2008, however, the RMA seemed to go on alert.

A report by USDA’s Office of Inspector General says a preliminary analysis of the situation was done in May 2008. There was a possibility that, because of the discrepancy between the actual nonirrigated corn yield and the expected county yield for the crop, producers in the county could purchase GRIP coverage and “be guaranteed up to five times the value of the crop they produced.” Further, producers of nonirrigated corn had “no possibility of producing the expected county yield.”

The RMA announced there would be 100 percent spot checks in the early-, mid- and harvest-season periods, Palmer says, conducting stand counts and verifying the “intent to grow.”

Palmer says he can’t say for sure what caused the RMA alert. He describes a 2-foot-tall “And Justice for All” poster in his crop insurance office, which carries a phone number for citizens to report suspected waste, fraud and abuse. He says it wouldn’t surprise him if some neighbor, disgruntled about competing with outsiders for land, may have called.

Palmer says the audits applied to everyone and were “paperwork nightmare,” but that the vast majority of his clients were able to prove they’d used good farming practices — chemicals, fertilizers, applied at the right times. He says there was some “phenomenal” corn grown in that part of the world in 2008 — 235 bushels per acre, irrigated — and generally just a “good, average, decent corn yield.”

The GRIP program went forward in 2008, but with a lot of scrutiny by both the RMA and OIG. Some farmers received no payments, others partial payments. The Grabanski entities are involved in legal actions against the U.S. Department of Agriculture.

On Jan. 12, 2009, the RMA shut down both the GRIP program for Colorado. There were no more GRIP audits because there was no program for nonirrigated corn.

In a ‘Colorado GRIP’

The OIG issued its report on March 4, 2009, came out with a report, concluding that “for some county crop programs, RMA offered GRP/GRIP insurance blended (irrigated/non-irrigated) on a yield because it believed it did not have sufficient NASS production and acreage area data to establish the insurance program by practice.” In one county, the disparity was 138 bushels an acre.

“We also noted that four insured broke out or sodbusted about 6,800 acres of highly erodible land to participate in the program, as designed,” the OIG said.

The agency says that it found 513 additional GRP/GRIP county crop programs in 15 states and 376 counties that had a potential for “producers taking advantage” of the disparities.

Administratively, the last National Appeals Division hearing on that was in May 2010.

“It’s still in that process and waiting on a decision,” Todd says.

He says the Grabanski entities had an “adverse hearing office determination,” which has gone to the director level for review.

Todd says there are five lawsuits in Colorado’s Baca County involving GRIP corn in 2008.

“Technically, there’s not a class action, but there’s a lawsuit in the U.S. District Court in Colorado, in Denver, that involves another variation of the GRIP case. Hanson Colorado Farms is among six plaintiffs in a case against the FCIC, filed May 26, 2010. The plaintiffs allege that the RMA wrongly determined that certain acres had not been planted pursuant to ‘good farming practices.’

“Some of the land was planted to corn for that crop year was planted on fields that were broken out — CRP fields — and so while there weren’t any rules against that, after the fact, and in order to limit its liability, the RMA determined that those fields weren’t insurable,” Todd says.

Post-hoc ineligibility

USDA’s OIG audit determined that RMA had “over-insured nonirrigated GRIP corn by $35 million in that county,” Todd says. After the report, the RMA then made “multiple decisions” trying to limit the payout — “trying to fix their mistake,” he says.

“As part of it, they invalidated a couple of policies — a couple of large polices — and one in particular involving some North Dakota folks,” Todd says. “They denied insurability based on these break-out acres and then they manipulated the payment and reduced the payment to (other) folks that they did pay.”

Todd says the Colorado Farms people didn’t get paid anything under GRIP for 2008 GRIP corn, based on “post-hoc” decisions by the RMA.

“In 2008, there was no rule against insuring GRIP corn on former CRP acres or subsequent to a grass crop, nor was there any rule that considered this practice to not be in accordance with good farming practices,” Todd argues, in the lawsuit documents.

In some cases, the RMA justified this by saying the farmers should have had a “fallow period” after converting it from CRP or other grass. Todd argues that the real reason for the failures was 70 percent attributable to rainfall during a critical six-week period. He says the broken ground in fact yielded the same as dry-land corn hadn’t been in grass the previous year.

In the pending lawsuit, Todd says the plaintiffs bought their GRIP policies in March 2008 and started planting in April. He says the county experienced a “severe drought” in 2008, which “significantly damaged” both irrigated and nonirrigated corn. He says in “many cases,” however, “Subject Acres,” which were nonirrigated, were the “best acres” harvested by the plaintiffs.

Arbitrary and capricious?

Todd says the RMA accepted premiums on GRIP in October 2008 for 2009 crops, but later returned some of the premiums.

Seven of eight farmers interviewed by the OIG claimed that their insurance agents did not promote the policies in 2008 “because it cannot be used as collateral for an operating loan” and that payments would not come until April of the following crop year. At least some of the agents OIG interviewed told the ag ency GRIP “does not provide an absolute guarantee per acre like other crop insurance policies” and carries higher premiums.

In the report, the OIG referred to “a group of out-of-state investors” who purchased GRIP policies. They say that “with multiple entities,” the investors purchased or rented more 11,000 acres of which 10,840 (9,335 nonirrigated, 1,505 irrigated) were covered by policies with a liability of $11.9 million. The investors “sodbusted over 3,400 acres of fragile, highly erodible land that they planted to corn.” The OIG preliminarily estimated the group could receive $8 million. If the group had used traditional Revenue Assurance policies, there would have been more conditions and a maximum pay-out of $2.69 million for the out-of-staters, according to the report.

Meanwhile, the operations were involved with lender issues. PHI says Grabanski applied for a loan on behalf of Colorado Farms and G&K Farm July 29, 2008. On that date, Grabanski claimed his own net worth at $20.76 million and that G&K Farms’ net worth was $6.48 million. PHI says Grabanski listed “long-term assets” at $14.2 million, including the Unruh land, in Texas, and North Dakota land associated with family names of Egeland, Mohagen, Halfpenny.

PHI says the initial loan was $5 million Aug. 26, 2008. The line of credit was increased to $6.5 million on Nov. 5, 2008. They say Grabanski and others (Colorado Farms, G&K Farms, and Tom and Mari Joint Venture) “failed to make any payments” by a Dec. 1, 2009, maturity date. PHI filed a lawsuit in North Dakota on April 2, 2010. The 15 defendants in the adversary action included the partners, including the Hanson family.

On March 13, 2009, Grabanski applied for an increased the line of credit.

Shortly afterward, PHI increased the line to $8 million, in part based on the earlier financial statements and in part based on projections, including crop insurance guarantees for 2009 corn and sunflowers.

PHI officials say they learned later that a Colorado Farms operation planted sunflowers and pinto beans and didn’t plant corn.

“It subleased approximately 12,000 acres of its land in Colorado to another entity known as Hanson Colorado Farms,” which “farmed land on this leased land,” PHI says. They say Hanson Colorado Farms wasn’t a borrower, nor was it identified as a “recipient” of the PHI loan proceeds.

In their adversary action in the bankruptcy court, PHI says that on Sept. 21, 2010, in a creditor’s meeting, Grabanski testified that G&K Farms “has never owned real property, contrary to the July 2008 financial statements.” They claim the statements were made “with the intent to deceive PHI.”

In Colorado, the Grabanski-related entities on March 31, 2010, held a farm land auction for 8,724 acres, Brown says. About 100 people attended, estimates Brown, who was there. Some of the offered land didn’t sell. It isn’t clear whether all of the land was offered for sale.

On July 9, 2010, the Grabanski operations held a farm equipment sale in the Grafton area.

How will it shake out?

The Grabanskis late last summer moved from Grafton to Blossom, Texas, where they’re living on a farmstead on the Unruh land, with children enrolled in local schools. The Grabanskis could not immediately be reached by Agweek for comment, as their phone numbers have been disconnected or are not working. Merlyn and Dolores Grabanski did not return phone messages.

Lenita Unruh says taxes on the Texas land she sold to the Grabanski operations will be due again in Lamar County, Texas, on Nov. 30. A land payment will be due in January. It isn’t clear what, if any farming will be done in Colorado.

On Nov. 4, 2010, the Keeleys say, Crop Production Services informed them they were liable for $633,172 in principal and $144,261 in interest. They say Choice Financial told them they’re liable for a $1.96 million debt and that G&K Farms has a negative net worth of $5.3 million.

Tom Grabanski’s “examination” in Grand Forks offices of the attorney for AgCountry, was scheduled at Nov. 24, the day before Thanksgiving.

Grabanski Grain

n Allegations, claims in Grafton, ND, elevator site

GRAFTON, N.D. — Grabanski Grain L.L.C. is a corn facility built by Tom Grabanski on the west side of Grafton, N.D. The entity filed Chapter 11 bankruptcy in late July.

Sue Richter, licensing division director of the North Dakota Public Service Commission, notes that the facility was licensed in 2007 and ended with 439,000 bushels of bin storage, a 511,000-bushel bunker storage — 950,000 bushels in all. It had a $340,000 bond on file.

After the Grabanski Grain’s bankruptcy filing in late July, the PSC received claims from Michael Suda of Grafton, for the Suda group. Others were Lance Lenton of Minot, N.D., for $50,000; Sproule Farms of Grand Forks. Grabanski had a $350,000 bond.

AgCountry says Tom and Mari Grabanski were “signatory parties” to several financial instruments connected to the facility, according to Farm Credit Services AgCountry documents. They include:

As of April 2009, the grain company was in default. On Dec. 10, 2009, and Feb. 26, 2010, in North Dakota’s Walsh County, courts allowed AgCountry to move on its collateral, but the lender says there were problems.

AgCountry alleges the Grabanskis and the grain company, along with BP & Sons, Ben Peters from Morden, Manitoba, and others sold and disposed of “numerous loads of crop inventory” that should have been AgCountry collateral. They say the Grabanskis and their accountant, Jennifer Tibert, misrepresented the inventories, concealing $2 million in sales and diverted proceeds to insiders.

On July 9, 2010, Tom Grabanski Farms held a large farm machinery equipment auction in Grafton. The company voluntarily ceased to business at the elevator on Oct. 27.

On Nov. 2, 2010, St. Hilaire (Minn.) Seed Co., which had an existing license for 66,000 bushels on the Grafton site, became the new operator of the facility.

Richter says it hasn’t been sorted out how many of the claims might be subject to the bond, or a state indemnity program on price-later contracts.

XXX

Entities listed by

Farm Credit Service

Entities listed by Farm Credit Services AgCountry, where funds could have been directed. It isn’t yet clear how many of these entities were actually used.